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Hi All,

My wife and I are currently exploring house and mortgage options in the Boston area (oh the sticker shock!) and wanted to tap into the info here with regards to structuring our financial decisions. To give some background, we recently sold our condo bought at the peak in 2005 for a small loss. Our saving/investing philosophy has been to shelter as much money as possible in either Roth IRAs to both grow tax free and serve as an emergency source of funds or in our 401ks. Happily we've never had to tap the Roths and as our incomes grew we were able also build some funds in a savings account.

We have a child entering school in 2014, and to get into the town/school systems we want, we'll have to look for homes in the $500k-650k range, meaning at the high end we'd have to get a jumbo mortgage with 20% down. I'd really prefer to get "only" a 500k house, where we could put 10% easily, but so far the ones we've seen in that price range have unacceptable defects (and no, we're not looking to move out of the state, as if anything, my industry is consolidating in this area). Our mortgage broker says we'll have no problem getting pre-approved for up to 750k, which is more than we're willing to actually spend (based on back of the envelope calcs, the actual application for pre-approval went in this morning). Before selling our condo, we were putting away the equivalent of $3500 PITI between savings contributions and mortgage payments, so I'm comfortable that we can support that level of mortgage.

The question I'm currently pondering is where to pull the up to 130k downpayment from.

These are the numbers I'm currently playing with:

Savings Acct 82000 Currently earning a pittance
Stock Acct 14500 After tax estimate
Roth Contributions 71000 Tax and penalty free if withdrawn
Company stock award 13000 After tax estimate, vests 7/22
Rest of Retirement Port 366500 Combined 401ks, rollover IRAs, etc.


Options I see if we have to go up to 650k:

1. Combine the savings and two stock accounts to get most of the way there, then tap the Roth contributions for the rest. This would leave us with only 50k of liquid funds in the Roths to tap in case of emergency, plus the contributions can never be remade. We'd have to rebuild our savings outside of the Roths since we can only put 10k in a year (assuming we don't hit the income max soon).

2. My 401k offers the option to take a loan of up to $50k at 4.25% that our mortgage broker says can be used for part of the 20%. If we chose to do that, we could cover the whole downpayment out of the loan plus liquid savings. Downside is that the withdrawn funds aren't available to appreciate for a while and the loan is due if I lose my job. Failure to repay leads to both penalties and taxes. However, we would conserve the Roth monies and could liquidate the stock funds into savings, providing both an initial savings cushion and maintaining the Roth "true emergency" funds. I guess if I ever did lose my job, the play would then be to scrounge up money however possible including tapping the Roths to pay off the 401k loan.

So, I expect a chorus of "retirement funds are for retirement!" I understand the sentiment, but at the end of the day, money is fungible, and I'm trying to figure out the best and safest way to use the assets we have to get the house we want. Any advice?
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Jumbo mortgages start at $417k, so even a $500k house would require a 17% down payment - which is all of your cash savings - to get to a non-jumbo mortgage. No matter how you slice it, you're likely looking at jumbos.

I'd stick with 10% down and don't worry about the jumbo mortgage. You'll probably have to pay PMI as well with 10% down, but so be it.

That leaves all of the retirement accounts untouched AND still leaves some of the cash liquid and available for moving costs and all of the stuff you'll need with a new house. Like painting, carpets, drapes, some new bit of furniture that would go perfectly in that spot over there.

With interest rates at historic lows, I see no good reason to use any more cash reserves than necessary.

--Peter
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So, I expect a chorus of "retirement funds are for retirement!" I understand the sentiment, but at the end of the day, money is fungible, and I'm trying to figure out the best and safest way to use the assets we have to get the house we want.

Heh. Good that you are prepared for the chorus, as it will come. I confess I too favor thinking outside the box, having tapped retirement savings, such a paltry sum as it was, in my early 20's to get the down money for my first house. With penalty no less, yet am still on target to get us out of the rat race at 52. If you are disciplined enough, you can recover.

2. My 401k offers the option to take a loan of up to $50k at 4.25% that our mortgage broker says can be used for part of the 20%. If we chose to do that, we could cover the whole downpayment out of the loan plus liquid savings. Downside is that the withdrawn funds aren't available to appreciate for a while and the loan is due if I lose my job. Failure to repay leads to both penalties and taxes. However, we would conserve the Roth monies and could liquidate the stock funds into savings, providing both an initial savings cushion and maintaining the Roth "true emergency" funds. I guess if I ever did lose my job, the play would then be to scrounge up money however possible including tapping the Roths to pay off the 401k loan.

If you indeed only have two choices, then I would personally pick number 2. It keeps your options open, so even though you lose earning power for a while, you still have a set amount in retirement funds unless all he!! breaks loose and you have to tap your Roth to pay off your 401K. However, are the 401K funds not considered borrowed? Won't the mortgage co have an issue with you borrowing down money? We've always had to show how our money got to the account we used to show we had funds needed, and they had to be seasoned. They look closely for borrowed funds these days, and you may even have to sign a document stating none of your down money is borrowed.

Of course, this also brings up the question of just how safe is your job, and are you willing to put your family at risk of the consequences of extending yourself in this manner?

What is the problem with putting only 10% down? Yes, mortgage insurance, but less risk as well, given greater $$ buffer in accounts. And if your goal is to get your kid into a good school district, are you 100% sure of the one you picked as being THE one? LOTS of fabulous school districts in that area, with housing getting cheaper as you go further out. Have you run the buy vs rent calculations to see which is actually the best bet? There is more than one way to get into a good school district.

So clearly I don't have nearly enough info to actually make suggestions other than proposing more questions to ask yourself.

IP,
who grew up in the Boston area
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To give some background, we recently sold our condo bought at the peak in 2005 for a small loss.

Was it a short sale? If so, there's a credit seasoning period of 2-4 years, depending on the lender.
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Jumbo mortgages start at $417k, so even a $500k house would require a 17% down payment - which is all of your cash savings - to get to a non-jumbo mortgage. No matter how you slice it, you're likely looking at jumbos.

Thank you, but no, the Boston area is a high income area with a conforming limit of $465,750, so we could go as high as $517500 with 10% down. Unfortunately that doesn't get a house we're willing to live in. I wish it did.

I would love to put down less money, but I don't see a way to do in our area.
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If you indeed only have two choices, then I would personally pick number 2. It keeps your options open, so even though you lose earning power for a while, you still have a set amount in retirement funds unless all he!! breaks loose and you have to tap your Roth to pay off your 401K. However, are the 401K funds not considered borrowed? Won't the mortgage co have an issue with you borrowing down money? We've always had to show how our money got to the account we used to show we had funds needed, and they had to be seasoned. They look closely for borrowed funds these days, and you may even have to sign a document stating none of your down money is borrowed.

I questioned this as well, but my mortgage broker claims that a 401k loan is ok to use. Frankly, I was surprised.

What is the problem with putting only 10% down?

I was told you can't get a jumbo with 10% down. Otherwise that's absolutely what I would do. The good school district is one goal, but reasonable commutes is an equal one. Unfortunately the towns with good schools and commutes into Cambridge and Waltham also happen to be among the most expensive in the state. We're not willing to go over an hour for the commute.
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Was it a short sale?

No, it wasn't a short sale.
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We're not willing to go over an hour for the commute.

One way or round trip? Is the T an option for work? Bro commutes via T from Sharon to Cambridge and it takes less than an hour....one way of course. Killer schools. Weston, Newton, Medfield, Dover, and of course Brookline, to mention just a few... there is an embarrassment of riches when it comes to good school districts in the 128 corridor.

Good luck!

IP
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One way or round trip? Is the T an option for work? Bro commutes via T from Sharon to Cambridge and it takes less than an hour....one way of course. Killer schools. Weston, Newton, Medfield, Dover, and of course Brookline, to mention just a few... there is an embarrassment of riches when it comes to good school districts in the 128 corridor.

One way, but it's the absolute max we would tolerate and would prefer less. We'd also prefer if we both didn't have hour long commutes.

We'd love to be on the T, it's one of the reasons we may stretch for Concord. Newton's on our list, very little is available there for under 600k. Weston and Brookline are out of our reach, as there is literally nothing in our price range. The other towns to the south would be bad for commuting to Waltham as I would be stuck fighting 128 traffic the whole way (been there, done that, don't wanna again).

The well perceived towns around Boston are kind of crazy right now, with very low inventory and bidding wars on anything decent that hits the market. When we sold the condo (sadly not in a well perceived town) we got 5 bids over asking with 2 all cash offers and ended up settling for just 7% off the 2005 price. Good for us as sellers, but daunting as buyers now...
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all of the stuff you'll need with a new house. Like painting, carpets, drapes, some new bit of furniture that would go perfectly in that spot over there.

These are usually wants and not needs and don't have to be done the minute you move with the exception of some type of window covering if buying new construction.
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The well perceived towns around Boston are kind of crazy right now, with very low inventory and bidding wars on anything decent that hits the market.

Right now? It's pretty much a way of life for that area! I hated moving...love Boston with a passion...but knew that the cost of living would sink me. If you can't afford a place that is to your liking now, look for a place that has the potential to get there and work to get it right.

IP
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... the Boston area is a high income area with a conforming limit of $465,750 ...

I believe that's a jumbo conforming, with rates slightly higher than a conforming loan of $417k or less.

But you can still go to the jumbo market and only put 10% down. I'd hate to burn up so much of your reserves for a down payment when you can get a mortgage with 10% down instead of 20%. Then if things should go badly for a period of time (job loss, sickness, injury, things like that) you'd still have your savings to keep the mortgage current and buy food. That extra $65k down payment would get you through 18 months of your proposed $3500 per month mortgage payment if you still had it in your pocket.

It's an option to consider, and one that you seem to be unaware of or have eliminated without explanation. Not that you owe anyone an explanation, of course. It's just that internet kibitzers tend to fill up these kinds of information voids.

--Peter
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Hi Brewologist,

The question I'm currently pondering is where to pull the up to 130k downpayment from.
Change your premise;
There is 90% Jumbo financing in MA, no PMI, as follows

740+ scores
10% down, no PMI
5/1 ARM @ 2.8%
30 FRM @ 4.75%

Or, 85% if your credit isn't quite so pristine;
720-739 scores
15% down, no PMI
5/1 ARM @ 2.7%
30 FRM @ 4.6%

Rebalancing your taxable savings & stocks (after setting aside sufficient safety reserves) into your real estate equity would probably be a decent move at present... so roll your 10% down plus non-seller-paid closing costs out of that account into the real estate account.

$65k is 10% down....
$19,500 is 3% assumed closing costs & prepaids.
=======
$84,500 gets you the key on $650,000 home.

On the 5 yr ARM;
$2,403.73 Mortgage payment (plus taxes & insurance.)
On the 30 FRM;
$3,051.64 Mortgage (plus T&I.)

Consider your Roth funds as your safety net until you have re-built non-ROTH liquidity.

Keep your working capital out of your housing to as much degree as possible. If you want to invest in real estate equity, do it on properties that pay you, not the property you consume.

Helpful?
Dave Donhoff
Leverage Planner
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I was told you can't get a jumbo with 10% down. Otherwise that's absolutely what I would do.

Try Sierra Pacific Mortgage, which does business in MA. I'm doing a high balance conforming refinance now to 90% LTV but, of course, mortgage insurance is required. The rate for a 30 year FRM, after all adjustments, including lender paid PMI, is 3.75%.

https://spmwholesale.sierrapacificmortgage.com/net/main/Comp...
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Was it a short sale?

No, it wasn't a short sale.

For the benefit of all readers, if an NOD [Notice of Default] was filed against the property, credit seasoning is 2-4 years, depending on the lender.
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Rebalancing your taxable savings & stocks (after setting aside sufficient safety reserves) into your real estate equity would probably be a decent move at present... so roll your 10% down plus non-seller-paid closing costs out of that account into the real estate account.

$65k is 10% down....
$19,500 is 3% assumed closing costs & prepaids.
=======
$84,500 gets you the key on $650,000 home.


Hi Dave,

What you laid out is exactly what I would like to do, I was just told 10% down financing wasn't available. Sounds like I need to reassess my mortgage broker...

Our credit is excellent, how much difference is there with a 7/1 or 10/1 ARM? Do you think 5 is the sweet spot right now?
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Brewo,

Our credit is excellent, how much difference is there with a 7/1 or 10/1 ARM? Do you think 5 is the sweet spot right now?
I do....

The 7 yr is 3.4%
10 yr is 3.7%

I think the 5 year is the overall winner due to a variety of factors;
A) Realistically, the rate markets are very likley to be suppressed a good while longer (just my opinion based on current & historical data... but I just don't see any susbstantial argument to the contrary,)
B) Based on your data presented so far, your savings growth rate on discretionary savings, plus the diferential savings form the 5 yr ARM, and the faster amortization accumulation (automatic paydown of the principal,) you would be in a position to stroke a check to wipe out the entire balance sooner with the 5 yr than with the 30 FRM (or either the 7 or 10 yr ARMs.)

Sounds like I need to reassess my mortgage broker...
Could be a good idea, indeed ;~)

Cheers,
Dave Donhoff
Leverage Planner
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Our credit is excellent, how much difference is there with a 7/1 or 10/1 ARM?

Forget about the 10/1 ARM. The pricing sucks at 90% LTV.
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If it were me, I'd probably take a $50K loan from the 401k -- with the proviso that you'd pay it back as rapidly as you can. You already know the risks of a 401k loan.
As you say, the problem with a Roth withdrawal is you can't put it back in. Leave it for emergencies.

---------------

However, are the 401K funds not considered borrowed? Won't the mortgage co have an issue with you borrowing down money?
When I did this -- well before the mortgage market meltdown -- they considered it not a loan, but me taking my own money from my own account. But they *did* consider the (required) monthly payment in my debt-to-income ratios.


Consider your Roth funds as your safety net until you have re-built non-ROTH liquidity.

Keep your [money] out of your housing to as much degree as possible.


I agree with both of these.

If Dave says you can get 10% down, no PMI, then you probably can. Sounds impossible to me, but I'm not in the field like he is.

But, with 30 yrFRM rates at 3.75%, I think it's nuts to take an ARM.

Hmmm. Took a quick look at a couple of places I've used. I used Boston, $650K, FICO 760.
Amerisave won't go above 80% LTV. 3.625% 30yrFRM
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If Dave says you can get 10% down, no PMI, then you probably can. Sounds impossible to me, but I'm not in the field like he is.

You can get no MONTHLY PMI, but with less than 20% down, there is surely PMI, which can be paid once up front or by accepting a higher interest rate.
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You can get no MONTHLY PMI, but with less than 20% down, there is surely PMI, which can be paid once up front or by accepting a higher interest rate.

Or no PMI at all with a portfolio lender that doesn't sell the paper.

Dave Donhoff
Leverage Planner
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I am in a similar situation WRT down payment & borrowing from 401k...

I know about the single premium PMI option, but hadnt heard that there are lenders out there who dont require PMI for less than 20% down...

Do I need to look for a different mortgage broker to learn more or are there web sites where I can learn more about these?
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but hadnt heard that there are lenders out there who dont require PMI for less than 20% down...

FWIW, when I first bought, I used a "80-10-10" (80% first, 10% second, 10% down)
I think those are rarer (if not gone altogether).
It was more expensive for the 2nd - but the overall interest per month/per year was cheaper than if the 1st went to jumbo rates + PMI.
My suggestion would be to contact a few credit unions in the area (and maybe a bank or two) and see if they can do a 2nd at closing and >80% LTV.

Or if they can't fund a 2nd at closing, see if they can do it immediately afterward - in which case the borrowing from the 401k can be repaid, and the interest probably becomes tax deductible (because it will be secured by the home)
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Brewologist:

<<<However, are the 401K funds not considered borrowed? Won't the mortgage co have an issue with you borrowing down money? . . .>>>

"I questioned this as well, but my mortgage broker claims that a 401k loan is ok to use. Frankly, I was surprised."

When I bought my first property (decades ago), this was a true statement and I voided PMI by borrowing 80% with a mortgage and funding the 20% (plus closing costs) from cash and 401k loan for 10% of the purchase price.

Not sure whether those rules still hold (and before the naysayers start, that 401k plan did not require immediate repayment upon departure [regardless or whether involuntary or voluntary]).

Regards, JAFO
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Brewologist: "2. My 401k offers the option to take a loan of up to $50k at 4.25% that our mortgage broker says can be used for part of the 20%. If we chose to do that, we could cover the whole downpayment out of the loan plus liquid savings. Downside is that the withdrawn funds aren't available to appreciate for a while and the loan is due if I lose my job."

You will be paying yourself interest on the 401k loan, so I would suggest that the funds are appreciating at a rate equal to the interest rate. Or perhaps you meant "aren't available [for me to invest in the market] to appreciate [or depreciate] for a while"?

And there is a further potential opportunity cost if the amount you could have earned in the market is greater than the interest you are paying yourself (instead of to a different lender).

Regards, JAFO
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Brewologist: "2. My 401k offers the option to take a loan of up to $50k at 4.25% that our mortgage broker says can be used for part of the 20%. If we chose to do that, we could cover the whole downpayment out of the loan plus liquid savings. Downside is that the withdrawn funds aren't available to appreciate for a while and the loan is due if I lose my job."

You will be paying yourself interest on the 401k loan, so I would suggest that the funds are appreciating at a rate equal to the interest rate. Or perhaps you meant "aren't available [for me to invest in the market] to appreciate [or depreciate] for a while"?


In the interest of full disclosure, I'm not a fan of 401(k) loans. Yes, "that's retirement money" is surely part of it, but primarily because I've found life rarely proceeds in accordance with the script I've written.

That said, remember that the "earnings" you're paying yourself in the 401(k) loan repayment interest will be taxed twice. You're making the payments with after-tax dollars, and everything that comes out of the 401(k) will be taxed as ordinary income. (This assumes there are no after-tax contributions. Loan repayments, including interest, are not contributions.)

Phil
Rule Your Retirement Home Fool
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TMFPMarti:

Brewologist: {{{"2. My 401k offers the option to take a loan of up to $50k at 4.25% that our mortgage broker says can be used for part of the 20%. If we chose to do that, we could cover the whole downpayment out of the loan plus liquid savings. Downside is that the withdrawn funds aren't available to appreciate for a while and the loan is due if I lose my job."}}}

<<<You will be paying yourself interest on the 401k loan, so I would suggest that the funds are appreciating at a rate equal to the interest rate. Or perhaps you meant "aren't available [for me to invest in the market] to appreciate [or depreciate] for a while"?>>>

"In the interest of full disclosure, I'm not a fan of 401(k) loans. Yes, "that's retirement money" is surely part of it, but primarily because I've found life rarely proceeds in accordance with the script I've written."

Not sure I would call myslef a fan of 401-k loans, for as we all know, sh!t happens. I only did it once, long ago, and did not suggest that the OP necesarily take the 401-k loan.

"That said, remember that the "earnings" you're paying yourself in the 401(k) loan repayment interest will be taxed twice. You're making the payments with after-tax dollars, and everything that comes out of the 401(k) will be taxed as ordinary income. (This assumes there are no after-tax contributions. Loan repayments, including interest, are not contributions.)"

Which is a true statement, but may not be that significant.

As you write, all funds coming out of the 401k will be taxed; the interest payments on 401-k loans are not singled out.

And as you know, interest paid on any "personal" loan is paid with after-tax money, i.e., not deductible, since 1986; once again the 401-k loan is not signled out.

Your statement does become an issue if the alternative to a 401-k loan is a loan secured by the real estate, for which interest payments would be deductible. If the OP could open an unsecured personal line of credit at 5%, and then borrows 10% of the purchase price, interest payments on that loan are also paid with after-tax money.

Regards, JAFO
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We'd love to be on the T, it's one of the reasons we may stretch for Concord. Newton's on our list, very little is available there for under 600k. Weston and Brookline are out of our reach, as there is literally nothing in our price range. The other towns to the south would be bad for commuting to Waltham as I would be stuck fighting 128 traffic the whole way (been there, done that, don't wanna again).

FWIW:

I work in Waltham and live in Reading. The commute is about 17 miles one way, all along the same highway (I95) and it can be fairly painless, especially if you are avoiding the 8-9AM and 5-6PM windows.

I don't know what size/configuration of house you're looking for, but $400K will buy you a very reasonably 4BR/2BA house in Reading, which I can attest is a nice town, and I'm told has decent public schools.

For future jobs, Reading is pretty convenient... it has a commuter rail stop, and my drive home from BU on most weeknights after 8PM is only about 15-20 minutes door to door up I93. There is also the Oak Grove Orange Line stop in Melrose/Malden that is a short drive from Reading and avoids having to be on I93 during rush hours.

Good luck.
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You can get no MONTHLY PMI, but with less than 20% down, there is surely PMI, which can be paid once up front or by accepting a higher interest rate.

Or no PMI at all with a portfolio lender that doesn't sell the paper.

You mean there's a secret stash of bargain priced 90% LTV jumbo money with no PMI? What are the investors in that portfolio--stupid?
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You mean there's a secret stash of bargain priced 90% LTV jumbo money with no PMI? What are the investors in that portfolio--stupid?

*ALL* lending is being done at a 50-75% subsidized-risk discount off real market costs.... the 3.5% 30 FRM mortgage would normally be going for 7-8% if the taxpayers weren't being used as a backstop to eat the future defaults.

Now who's looking stoopid?

Dave Donhoff
Leverage Planner
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I work in Waltham and live in Reading. The commute is about 17 miles one way, all along the same highway (I95) and it can be fairly painless, especially if you are avoiding the 8-9AM and 5-6PM windows.

I'm glad you like Reading, a co-worker of mine has been talking it up as well. But she gives the same caveat you did, about avoiding rush hour. Because of daycare/work schedules, it's difficult for us to do that. How long is your drive if you had to work 9-5 in Waltham?

I don't know what size/configuration of house you're looking for, but $400K will buy you a very reasonably 4BR/2BA house in Reading, which I can attest is a nice town, and I'm told has decent public schools.

While I agree it is more affordable than the towns we're looking it, there is exactly one sub 400k house with 2Ba for sale in Reading right now (I hope this link works) and it's literally on 93:

http://www.redfin.com/homes-for-sale#!market=boston&max_...

The market, it is crazy...
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You will be paying yourself interest on the 401k loan, so I would suggest that the funds are appreciating at a rate equal to the interest rate. Or perhaps you meant "aren't available [for me to invest in the market] to appreciate [or depreciate] for a while"?

And there is a further potential opportunity cost if the amount you could have earned in the market is greater than the interest you are paying yourself (instead of to a different lender).


Yes, your wording is more precise, and is indeed what I meant.
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You will be paying yourself interest on the 401k loan, so I would suggest that the funds are appreciating at a rate equal to the interest rate. Or perhaps you meant "aren't available [for me to invest in the market] to appreciate [or depreciate] for a while"?

And there is a further potential opportunity cost if the amount you could have earned in the market is greater than the interest you are paying yourself (instead of to a different lender).


You have to look past the form to the substance.

A 401k "loan" is not a loan, nor is the "interest" really interest. Nor, actually is the "payment" really a payment.

What is truly going on is that you are taking a withdrawal from your 401K, and then putting that money back in over a period not to excess 5 or 10 years. Plus putting in a small additional amount of after-tax money. It's like an IRA rollover except that instead of having 60 days to put it back in, you are allowed to do it monthly over 5-10 years.

That's if you jump through all the hoops, and don't leave your job before you've put it all back. Otherwise, the transaction is recognised for what it really is -- a premature withdrawal. And you get hit with the taxes & penalties of such a withdrawal.

The "interest" is not really interest. It's just you moving your own money from your checking account to your 401K account. There is no "growth" involved -- you don't make a profit when you move money from your left pocket to your right pocket.
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re: the Waltham-Reading commute

At rush hours it will run about 60 minutes on the highest side. Keep in mind that at 60MPH you are doing a mile a minute, so it's never going to be under 20 minutes, but I'd guess that 30-45 minutes is the average time at rush hours. It can certainly FEEL longer, but actually isn't unless there is something very wrong on the road. I've been doing this commute for 3 years and I don't think it has ever exceeded 90 minutes one way.


re: the market in Reading

A few thoughts:
- Expand your search to include 1.5BA, I know it's not ideal, but many places around here are older so having 2BA usually means it's newer or extensively renovated. It's a long shot, but there may also be people out there 1.75BA (stand up shower only in the 2nd bathroom) and who just don't put down 2BA, or the house is on the books as a 1.5BA

- Reading is full of 1920-1960 vintage Cape style houses. My house in particular is a 4BR/1BA Cape. I don't have any dormers, so adding a 12' domer to the center of the house for a good sized 2nd bathroom would be possible and likely in the ~$50K range without new foundations, etc. So if you don't NEED the second bathroom now, you could consider houses with the potential to add them later. It's more leg work and vetting, and it also means putting up with a month or two of construction at some point, but it might be worth it.

For reference, my house is 1550sq-ft. I gutted my kitchen and bath when I moved in, took down walls to open the kitchen/dining area, blown insulation in the walls, all new electric and plumbing in the house, refinished HWs, all new windows and exterior doors, new paint, new large deck off the back, lots of other systems updates... with all that work I think my house is worth about $350K today if it were for sale. I see plenty of similar, but less updated, places listed in the $350-390K range--these people are dreaming and the houses either languish for a season and are delisted, or they sell for $330-340K. So finding something like mine, where you can add a bathroom before move in (while staying inside your mortgage comfort zone) may also be a good option.
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The market, it is crazy...

Wow... I just expanded my search...

2BA is 1 house...
1.5BA is 5 houses...
1BA is 7 houses...

Then I flipped the switch to include houses under agreement... 38! I guess I haven't been paying attention.

I should put my house on the market, they're selling like hot cakes! ;)
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That said, remember that the "earnings" you're paying yourself in the 401(k) loan repayment interest will be taxed twice.

For those reading this, note that he specifically said earnings - i.e. the interest on the money.

I have seen people say that they will wind up paying taxes twice on the full amount borrowed - and that is not true.
But it is true that you're basically paying twice on the interest portion.
But that IMO is a minor consideration, and the "you're paying taxes twice" is a phrase that is more designed for an emotional impact, rather than logic.

Personally, I look at it as two separate sides.
1> I'm making an "investment" in my 401k into a "bond" that pays X% interest. And that bond is a "low risk" bond (because I believe I'm going to make the payments.
2> I'm getting a loan and paying X% interest on that loan. And the loan must be repaid almost immediately if I leave the job (either voluntarily leave or fired)

If I'm happy with both of those (or think the downside of one is more than compensated by the upside of the other), then it's a reasonable choice.
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But it is true that you're basically paying twice on the interest portion.
But that IMO is a minor consideration, and the "you're paying taxes twice" is a phrase that is more designed for an emotional impact, rather than logic.


Well, excuuuuuuuuuuuuuuuuuuse me. I stated it as blandly as I could. I'll grant your "minor consideration" as an opinion you're entitled to, but I'll not have you mischaracterizing my remarks, which were strictly educational and meant to counter the numerous statements one sees with regard to these loans that "you're paying yourself."

Personally, I look at it as two separate sides.
1> I'm making an "investment" in my 401k into a "bond" that pays X% interest. And that bond is a "low risk" bond (because I believe I'm going to make the payments.


Huh? You may choose to look at it this way, but I see it as paying pocket A with cash from pocket B, both pockets belonging to you, thus this "investment" yielding bupkes. Make enough of those investments and you'll be broke. As for the risk factor, I should hope that any time you buy any bond you believe that the debtor will pay up.

2> I'm getting a loan and paying X% interest on that loan. And the loan must be repaid almost immediately if I leave the job (either voluntarily leave or fired)

If I'm happy with both of those (or think the downside of one is more than compensated by the upside of the other), then it's a reasonable choice.


I agree. I just like fully informed decisions.

Phil
Rule Your Retirement Home Fool
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Rayvt: "You have to look past the form to the substance.

A 401k "loan" is not a loan, nor is the "interest" really interest. Nor, actually is the "payment" really a payment.

What is truly going on is that you are taking a withdrawal from your 401K, and then putting that money back in over a period not to excess 5 or 10 years. Plus putting in a small additional amount of after-tax money. It's like an IRA rollover except that instead of having 60 days to put it back in, you are allowed to do it monthly over 5-10 years."


First, IIRC, when used to purchase a home, you can have 30 years to put it back in.

Second, you must have a very peculiar definition of interest.

"Interest" is defined under the Finance Code as "compensation for the use, forbearance, or detention of money." See Tex. Fin. Code ' 301.002(a)(4).

Seems to me that the "small additional amount of after-tax money" you put is is what you pay for the privilege os using the 401-k funds, IOW, it is interest.

"That's if you jump through all the hoops, and don't leave your job before you've put it all back."

Are you certain of the truth of that statement? I am not. And it certainly was not true when I took a 401-k loan for home purchase.

"The "interest" is not really interest. It's just you moving your own money from your checking account to your 401K account. There is no "growth" involved -- you don't make a profit when you move money from your left pocket to your right pocket."

See the definition of interest that I referenced above and then please explain again how it does not apply in the context of a 401-k loan.

Moving money from your left pocket to your right pocket involves more "growth" than moving money from your left pocket to my pocket (either right or left).

Regards, JAFO
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*ALL* lending is being done at a 50-75% subsidized-risk discount off real market costs.... the 3.5% 30 FRM mortgage would normally be going for 7-8% if the taxpayers weren't being used as a backstop to eat the future defaults.

Yeah, I got that. What I don't got is sources for 90% LTV jumbo (above maximum Fannie/Freddie loan limits for the applicable county) with no PMI. The only lenders I can identify that go to 90% LTV for jumbo are:

~ Kinecta Federal Credit Union (ARMs only)
~ Navy Credit Union
~ NASA Federal Credit Union

They all require PMI--either lender or borrower paid--or 80/10/10.
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"That's if you jump through all the hoops, and don't leave your job before you've put it all back."

Are you certain of the truth of that statement? I am not. And it certainly was not true when I took a 401-k loan for home purchase.


This discussion got me curious enough to do some digging in the Code. Of course, there's nothing in section 401 where you'd think it would be. My second thought was section 72, where they hide just about everything regarding retirement plans. Bingo!

My curiosity extends only so far, and there's so much crammed into that section, that I didn't dig any further. I did notice that there seem to have been significant changes in 1982, there's a $50,000 limit (or lower), and primary residence loans must be paid back in a "reasonable" time (as opposed to other loans, which must be paid back in 5 years).

I too have something rattling around in my mind about accelerated payback if you leave employment, but I can't cite a reference. No matter. The most important thing to remember about anything regarding 401(k)'s is that there's not a lot in the law, and much is left up to the plan to decide. When you're contemplating doing anything regarding your 401(k) make sure you understand exactly how your plan deals with all situations you might encounter.

Phil
Rule Your Retirement Home Fool
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Well, excuuuuuuuuuuuuuuuuuuse me.
OK. You're excused.
:)

I'll not have you mischaracterizing my remarks, which were strictly educational and meant to counter the numerous statements one sees with regard to these loans that "you're paying yourself."

I don't believe I mischaracterized them.
I pointed out that
1> you accurately described the situation (that interest going into the account is paid with post-tax dollars),
2> that the phrasing "you're paying taxes twice" is an emotional charged phrase
3> the "pay taxes twice" is often stated in a way that people think they will pay taxes twice on the WHOLE amount, not just the interest. (you were accurate in your statement, but it is easy for people to misunderstand, especially when that misunderstanding is reinforced by other statements a lurker might see elsewhere.)

Huh? You may choose to look at it this way, but I see it as paying pocket A with cash from pocket B, both pockets belonging to you, thus this "investment" yielding bupkes. Make enough of those investments and you'll be broke.
Well, your other option is that you pay Ginnie with cash from pocket A (your 401k) and she pays you back with interest.
And you pay interest (and principal) from pocket B (your checkbook) to Mr. Bank
If you're paying Mr. Bank more interest than you get from Ginnie, you're going to be poorer than if you are just moving the money from pocket A to pocket B.

Since a loan of some sort *must* be involved, either from the 401k or from elsewhere, IMO it's easier to analyze the two halve separately, and then put the two halves together.

BTW: isn't "paying pocket A with cash from pocket B" pretty much the definition of "you're paying yourself" - a phrase I gather that you think is emotionally charged/misleading. :)
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First, IIRC, when used to purchase a home, you can have 30 years to put it back in.
I only have direct knowledge of Motorola's 401K plan. AFAIK, it's pretty typical. For a home purchase, you have 10 years. Not 30.

When I left in 2006, you had 60 days after quitting (or getting laid off) to pay off your 401k loan(s). I just checked -- and now, WOO-HOO! you can keep the loan(s) as long as you continue to make the monthly payments by direct debit.


"Interest" is defined under the Finance Code as "compensation for the use, forbearance, or detention of money" .... please explain again how it does not apply in the context of a 401-k loan.

Sure. Easy. You don't pay interest to yourself. You don't pay compensation to yourself. It's a logical impossibility. The entity (you) that is receiving the "interest" is the same entity as is paying the "interest".
Just like you don't "pay" yourself for mowing your own lawn.

The "interest" you pay on a 401k loan is simply an additional deposit, paid with after-tax dollars. All withdrawals are subject to income tax, both the original pre-tax contributions *and* those after-tax contributions.
The Moto plan also charges you a $50 fee when you take out a loan. Your net costs are this fee plus the additional tax you pay on those after-tax deposits that are labelled "interest".

It's not interest, and it's not "paying yourself XX%", and it's not a "XX% bond". It's just an additional contribution that you will eventually have to pay extra income tax on. You can consider it as a cost of making the loan, along with the $50 loan fee.
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Well, your other option is that you pay Ginnie with cash from pocket A (your 401k) and she pays you back with interest.

I don't know who "Ginnie" is. Would that be his wife?

'cause I know how it works when I loan money to my wife. She says, "Thanks for giving me some money."
If at some point she decides to pay me back (which has never happened), she'll just go to the ATM, take the money out of the joint checking account, and hand me the cash.

Actually, should I ever demand a real payment with real interest, she'll say, "Sure. You're gonna need that money to buy a warm blanket, because the garage is cold tonight." ;-)
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I don't know who "Ginnie" is. Would that be his wife?
GNMA or another bond investment with another entity.

But I suspect you already knew that and were going for the joke. :)
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Just like you don't "pay" yourself for mowing your own lawn.

You mean I don't get to drink the beers sitting in the fridge?
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TMFPMarti:

{{{"That's if you jump through all the hoops, and don't leave your job before you've put it all back."}}}

<<<Are you certain of the truth of that statement? I am not. And it certainly was not true when I took a 401-k loan for home purchase.>>>

"This discussion got me curious enough to do some digging in the Code. Of course, there's nothing in section 401 where you'd think it would be. My second thought was section 72, where they hide just about everything regarding retirement plans. Bingo!

My curiosity extends only so far, and there's so much crammed into that section, that I didn't dig any further. I did notice that there seem to have been significant changes in 1982, there's a $50,000 limit (or lower), and primary residence loans must be paid back in a "reasonable" time (as opposed to other loans, which must be paid back in 5 years).

I too have something rattling around in my mind about accelerated payback if you leave employment, but I can't cite a reference. No matter. The most important thing to remember about anything regarding 401(k)'s is that there's not a lot in the law, and much is left up to the plan to decide. When you're contemplating doing anything regarding your 401(k) make sure you understand exactly how your plan deals with all situations you might encounter."


Phil, my recollection is that companies got tired of dealing with actualy payments from people who left employment (no paycheck withholding if no longer employed) and lobbied to either (1) have the law changed to allow the 401-k plan documents to provide for loan acceleration if the borrower was no longer employed; thus no dealing with payment checks, but IIRC correctly, this was a change to the "reasonable" time requirement ( a chnage in the terms of loan) or (2) that ongoing monthly payments had to be by payroll withholding.

What I do know is that I had my one and only 401-k loan outstanding for several years after departing that employer.

Regards, JAFO
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Rayvt:

<<<"Interest" is defined under the Finance Code as "compensation for the use, forbearance, or detention of money" .... please explain again how it does not apply in the context of a 401-k loan.>>>

"Sure. Easy. You don't pay interest to yourself. You don't pay compensation to yourself."

So all those people who own simgle member LLCs or any other disregarded entity and pay themselves a salary reaaly do not have earned income? You ever try your arguemtn with the IRS.

"It's a logical impossibility. The entity (you) that is receiving the "interest" is the same entity as is paying the "interest"."

The IRS begs to differ (at least with respect to 401-k plans), otherwise, there would be no need to plan adminstrators and trustees with fiduciary duties.

Regards, JAFO
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I would love to put down less money, but I don't see a way to do in our area.

Depends which towns you are looking at. I'm out in metro west, and $500k buys a very nice house in a town with excellent school systems, so I'm wondering where you are looking.

Also, have you considered School Choice as an option where you might be able to live in a less expensive town and use School Choice to have your children attend school in a different town?
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The good school district is one goal, but reasonable commutes is an equal one. Unfortunately the towns with good schools and commutes into Cambridge and Waltham also happen to be among the most expensive in the state. We're not willing to go over an hour for the commute.

I'm within that commuting distance, and you can certainly find houses in good towns with good school systems for $500k. With that budget, I would think you could find something in Concord, Sudbury, Stow, Carlisle, Acton or even Boxborough, all of which seem to meet your criteria. If you are looking in Cambridge, Belmont, or Arlington, I can see where you might not be able to find anything, but I'm wondering if you have looked further west.

Drop me a line off the boards if you want more suggestions.
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I'm within that commuting distance, and you can certainly find houses in good towns with good school systems for $500k. With that budget, I would think you could find something in Concord, Sudbury, Stow, Carlisle, Acton or even Boxborough, all of which seem to meet your criteria. If you are looking in Cambridge, Belmont, or Arlington, I can see where you might not be able to find anything, but I'm wondering if you have looked further west.

We are looking in Concord, but there is literally nothing available under $500k: http://www.redfin.com/homes-for-sale#!market=boston&max_...

As for further west, do you really commute to a location in Cambridge in under an hour? How are you doing it? North Waltham to East Cambridge is taking ~40-45 minutes in traffic for my wife right now, working 8:30-4:30. Acton is at least on the commuter rail, but according to the schedule most trains take around 40 minutes to Porter and 50 minutes to North Station, then add time on either end for travel to and from the stations. I guess you can do it under an hour if you live close enough to the station and work right at North Station or within 10 minutes of Porter. But an hour is really our upper bound, we're actually looking for shorter than that preferably.

We looked at a house in Concord last week, and even with her leaving early at 4:15 the drive took over an hour. And the house, which needed a new roof plus had a bunch of single pane windows and hadn't been updated since the 50's went under agreement in less than a week after listing at $650k. We do really like Concord though if we can find something we can afford that isn't next to the Starmet site...

I hate the housing options in this state, but it's the reality we are having to deal with. We went to 3 open houses in Lexington over the weekend with list prices ranging from $535-642k. One was practically in Bedford and needed major updates, one was built in 1839 but could maybe be interesting if it weren't 10 feet off a busy street, and the last was again on a busy street plus had been modified in very weird ways.

Reading may be an interesting option, we will have to explore the town a bit to see if we feel comfortable there.
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As for further west, do you really commute to a location in Cambridge in under an hour?

I don't commute there, but my neighbors do. I have one neighbor that works in Cambridge and a couple that work in Waltham. I think they leave early, like around 6:30am and work around the heavy commuting hours.

I agree that Concord is expensive, but what about Carlisle? They share a school system, and I think Carlisle is more rural than Concord and less expensive.

I hate the housing options in this state, but it's the reality we are having to deal with.

I don't mind the housing, but I won't work in the areas around Boston so I don't have to deal with 128 or Rte. 2. I live off 495, and find there are plenty of places to work along 495 so that I don't have to go into the city and so don't deal with those nightmare commutes anymore.
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Conventional programs go to 97% LTV and are less costly than FHA loans.
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I thought I'd close the loop on this now that we've found and closed on our house. After looking at a lot of houses, we finally decided to spend up and buy a house in Arlington with 20% down. For us, we just can't tolerate the long commutes others seem to handle and this way our children can walk to an excellent elementary school.

The investor for our jumbo loan ended up not allowing us to use a 401k loan for our down-payment, despite our mortgage broker's previous repeated reassurances that we could. Happily, we were able to obtain some family gift money to cover the shortfall, and our broker reimbursed us for the minimal fees we had incurred to get and repay the 401k loan. A good argument for working with a trustworthy broker as has been suggested here before.

Unsurprisingly, the loan process was definitely more painful than when we purchased in 2005, but I was able to stay on top of it thanks to good communication with our broker about how to document everything. My favorite moment was being told I'd have to explain a credit check that was incurred only because of the investor's insistence that we pay off the 401k loan (our regular online bank doesn't do cashier's checks, which the loan required, so I had to open a new account to get one written, which meant a credit check, which was then flagged for inquiry). I do understand why it was necessary, but it tickled my funny bone that the people demanding the explanation were responsible for the situation in the first place...

My least favorite thing was waiting to hear what the final closing number was going to be, as we needed to wire the money to our attorney the day before closing. They got us the number just 10 minutes before my bank's cutoff for a same day transfer, which cut things closer than I would have preferred.

Thanks everyone for your advice both about financing and potential towns in Massachusetts.
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